What did the Money Center Q1 Earnings Tell Us?
AInvestTuesday, Apr 16, 2024 5:06 pm ET
3min read
JPM --

The first-quarter results for major money center banks are in the books. The results have been solid as every single institution beat on both the top and bottom line. However, the results have done little to assuage the current market fears around rising rates and geopolitical concerns as evidenced by the 2% decline in the SPDR Financial Select ETF (XLF).

The earnings of big money center banks are a barometer of the broader economic landscape, reflecting not only the health of the financial sector but also providing insights into consumer and business confidence, credit quality, and the interest rate environment. As these banks play a pivotal role in lending, their performance can indicate trends in loan growth and defaults, which are critical for economic activity. Their trading revenues offer a glimpse into market volatility and investor sentiment, while their net interest income is influenced by Federal Reserve policies and interest rate movements. Collectively, their earnings can signal the strength of the economy and inform investors about potential headwinds or tailwinds in financial markets, affecting investment decisions across the board.

Investors might find the initial price movements concerning, particularly as financials play a crucial role in shaping earnings season sentiment. Recently, the sector was scrutinized amid fears that increasing interest rates could signal emerging credit issues—a concern seemingly reflected in the recent price activity. Yet, upon examining these financial entities, we find a sector that stands on strong fundamentals and a well-capitalized balance sheet.

The markets response appears to be less about industry fundamentals and more a product of the overall trends and a pullback from the early gains of 2024, prompting a round of profit-taking. This analysis aims to delve deeper into these outcomes and the performance of individual stocks, aiming to identify prime investment opportunities. 

As we navigate the deceptive tides of earnings season's first week, it's crucial to approach initial stock movements with caution, as they often don't tell the full story. Now is an opportune moment for investors to compile a list of solid, prospective holdings to buy on pullbacks.

Money Center Peer-to-Peer Comparisons:

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In the realm of profitability measures, Goldman Sachs $GS(GS)distinguished itself with a leading Return on Equity (RoE) of 19.7%, with Morgan Stanley (MS) close behind at 19.2%. JPMorgan (JPM) took the lead in Return on Tangible Common Equity (RoTCE) with an impressive 21%. Citigroup $C(C) trailed with the lowest figures in both RoE and RoTCE at 6.6% and 7.6%, respectively, signaling a relatively lower return on shareholders' investments. Overall, the group saw a big improvement from Q4 results which saw a significant impact from the FDIC fees. 

When it came to revenue growth year-over-year, JPMorgan stood out with an 8.0% increase, marking it as the top performer. Conversely, Bank of America (BAC) $BAC(BAC)and Citigroup reported a decrease in revenue, both by 2.0%, reflecting a challenging environment or potential strategic shifts. JPM continues to benefit from its First Republic purchase. In terms of Net Interest Income (NII) growth, Goldman Sachs soared with a 16.0% increase, benefiting from an uptick in Capital market activity and easier comps, while Wells Fargo (WFC) experienced a slight contraction of 0.8%. In general, NII declined on a year-over-year basis, but the figures were better than feared. Investors would have liked to have seen institutions provide a more upbeat outlook on NII but the money centers remained cautious when providing forward-looking guidance on this metric. 

Goldman Sachs and JPM Morgan topped the charts in trading revenues. GS saw particular strength in its equity trading with $3.31 billion. In the fixed income, currency, and commodities (FICC) trading arena, JPMorgan prevailed with revenues of $5.30 billion despite a year-over-year dip of 7%. 

Valuation metrics such as the price to book value ratios show Morgan Stanley as the most expensive name in the group. Citigroup's lower book value/price ratio suggests it may be undervalued as investors remain skeptical over its turnaround. Over the past three months, WFC and C have had the best returns as investors see value in the cheaper names. The forward Price-to-Earnings (P/E) ratio sees Morgan Stanley with the highest at 12.3x, whereas Goldman Sachs's lower P/E ratio of 9.9x could suggest it is undervalued on this metric, especially given its strong NII performance.

Loan growth was robust at JPMorgan, leading the pack with a 16% increase, driven by its favorable purchase of First Republic last year. Wells Fargo saw a slight decline, which could signal a conservative lending approach or market saturation.

In assessing asset quality, Wells Fargo provisioned the largest amount for credit losses at $1.97 billion, indicating caution amidst credit risk. JPMorgan, however, reported the highest net charge-offs as a percentage of loans, suggesting it's feeling the impacts of default more acutely. This was also impacted by the First Republic book. Yet, it also has the highest allowance for credit losses, demonstrating a proactive stance on potential loan defaults. Banks continue to see their balance sheets as sturdy and any credit issues they see on the horizon are manageable. 

In summary, the banks presented a mixed bag of outcomes, with Goldman Sachs and JPMorgan generally leading in profitability and growth metrics, while Citigroup lagged in several areas, potentially reflecting strategic hurdles or market responses. Wells Fargo's higher credit loss provisions and JPMorgan's higher net charge-offs underscore a cautious approach to credit risk in uncertain economic times. Overall, these financial giants showed resilience, with varying degrees of success across different segments of their businesses.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.